A Positive 2016 in Store for Material Handling

ITR Economics CEO Brian Beaulieu will be presenting at the MHEDA Convention on Monday, May 2nd, 2016, from 1:45 p.m. to 3:00 p.m. The MHEDA Journal had an opportunity to speak with Brian about his presentation, "Prosperity in the Age of Decline" and about what 2016 has in store for the economy and the material handling industry. The MHEDA Journal: Based on your research at ITR, what do you expect 2016 will bring to the material handling industry? Brian Beaulieu: The outlook for 2016 is good. The industrial side of our economy in North America is soft right now because of the oil patch and because of a very strong dollar and normal business cycle influences. But the oil patch is going to be stabilizing, the dollar is going to be going the other way against most of our trading partners and the material handling group, in particular, is one of our stronger sectors because the consumers are alive and well and out there spending money. Goods need to be moved within distribution channels and warehousing. We’re very upbeat for this sector and the consumer-based leading indicators are positive for 2016, so we think it’s going to be a good year. TMJ: What are some of those leading indicators that MHEDA members should keep an eye on? BB: Keep an eye on housing starts. I know that’s not directly related to the material handling industry, but it reflects a demand-pull aspect of the business. I’ll be discussing this at Convention, but employment numbers are something to keep an eye on. We’ve seen some weakness over the past couple of months in that sector so that’s something to remain vigilant about. Another important indicator is retail sales. This sector responds well to rising retail sales. And finally, keep an eye on the interest rates. We want to make sure that if rates start going up, it’s at a gradual rate. If rates go up 100 basis points, which would be 1 full percentage point, that really won’t mean much of anything. If they go up 2 full percentage points, people in this industry will begin to see some decisions being deferred or some potential yes’s that may turn into no’s. And if interest rates go up 3 full percentage points, in this industry we’ll start to see some capital expenditure programs delayed and they will feel that. So they need to be looking at the magnitude of the rise that is occurring in interest rates. And of course, ITR will be doing that for them but that’s one of the keys. TMJ: Do you anticipate rates moving in the near future? BB: I don’t think they’re going to move soon. There’s virtually no inflation to be measured in the economy at this time. I don’t think the Fed would have any basis for raising rates in the next one or two quarters. That doesn’t mean they won’t move. They could preemptively move them, but I don’t think there will be an actual reason evident in the economy for at least the next two quarters. TMJ: Do you think the Presidential election will have any impact on the economy in 2016 or 2017? BB: The soonest that the new president could make any kind of influence on our industry would be late 2018 or early 2019. We’ll have plenty of forewarning based on their policies whether it will be good or bad. They won’t be able to have any immediate impact on our industry for 2017 or even the first half of 2018. We have plenty of time to worry about that. TMJ: Are there any especially strong industries that our members should be involved in? BB: I think if housing would be a great industry to be involved with. Food and beverage. Production in that industry doesn’t always go up, but the need for those continuously goes up so members should insert themselves into that process. Distribution within the energy industry will continue to be strong, so they may be able to find a niche in that process that they could service. Also, I would look for warehousing needs. Warehouse build rates right now in the US are very strong. They should be involved with the chemical industry because the chemical industry is building out very rapidly in this country. Those are sectors I strongly encourage them to find a means of participating. TMJ: One of the Critical Impact Factors for 2016 deals with consolidation. Is that a trend confined to material handling or is it business-wide? BB: That’s a business-wide trend. It’s driven by many factors. One is corporations have a lot of cash. It’s driven by interest rates being low. It’s driven by the fact that more and more baby boomers every year are reaching the place where they want to just retire and get out of the game. You’ll see more and more consolidations we think. TMJ: What does that mean for the industry? Is it something that should excite members? Scare them? BB: I don’t think it should scare them. Members should see it as an opportunity to a) really specialize so that you can carve out a niche for yourself or b) work to position your business over the next 3 years so that you’re ripe for consolidation, if you’re thinking you might want to get out of the game. But if you’re going to stay as an independent player you need to understand that consolidation can bring some real cost advantages to the consolidated entity after the first one to two years. They can start reaping some nice cost advantages. So we certainly aren’t going to have the luxury of resting on our laurels in any aspect of this business. TMJ: When ITR last presented at Convention, Alan Beaulieu forecasted a possible recession in 2019. Is that still the expectation? BB: We’re still concerned about around the first half of 2019. The prospect of rising interest rates is certainly indicative of a potential weak point in the economy. There are a couple of different approaches here. We could also see by 2019, oil is back up significantly because there is a major disruption to supply in the Middle East. That happening in about three years makes all the sense in the world when you look at the governments in the Middle East. There are different factors that tell us to be cautious of what you’re planning in late 2018 and the first half of 2019. TMJ: How should members begin to prepare for that possibility? BB: The primary thing members should be doing right now is investing in their businesses so that they can become even more efficient and/or move into new markets or handle new lines. Doing something new needs to be part of their mantra and they need to have that planning done and have that implemented come mid-2017 so that in 2018, 19 and 20, those plans are bearing fruit. That will be their best protection against any potential weakness in the economy in that 2019 period. TMJ: Any other indicators that members should keep an eye on? BB: The media loves to discuss China. China, according to their numbers which are probably overstated, accounts for 13.4 percent of Global GDP. Europe accounts for about 25 percent of GDP. Europe is in a gradual, but it will prove to be persistent, business cycle rising trend through 2016. While everybody is looking at China, let’s not overlook the fact that Europe is getting busier. Things are improving in Europe and that creates some opportunities for domestic players here in the United States and that capacity will be absorbed somewhat in Europe. We’re likely to see the US dollar weaken against the Euro in 2016. We’ll get some of our pricing advantage back here domestically. Europe improving represents an overall demand pull on global resources. Another thing I’m going to touch on in my presentation is that our members should be looking at Mexico and Central America as destinations of opportunity. There’s going to be a lot of upside going on there over the next 10 years.